Welcome back to the Agri Fintech Newsletter and a warm welcome to the 13 new subscribers since my last issue. 🙂
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In this Issue
🧐 Thoughts ‘Why rising rates will slow Agri Fintech growth?’
Rising rates highlights a structural flaw in Fintech models - funding.
🗞 Relevant News
Agrolend - go big with Series B in Brazil
Agriconomie - a European Champion in digital Ag Retail?
Hong Kong Exchange - launch a Carbon marketplace
DGV - sign another bank partner for Dairy
Why rising rates will slow Agri Fintech growth 🐌
I recently posted a poll on LinkedIn to gauge views on two specific challenges facing Agri Fintech. The result was a 50/ 50 split!
Rising interest rates worry me more and in this Issue I will explain why.
In short, it exposes a structural problem of Agri Fintech - and to a wider extent Fintech in general: Competing with Banks and their funding base.
What are we talking about?
➡️ "We need banking but don't need banks" - Bill Gates
➡️ Driving the economics
➡️ What happens now?
"We need banking but don't need banks"
This is a quote from Bill Gates sometime in the 1990's (the exact time is unclear), which I referred to in Issue #2 of this Newsletter discussing the Financial stack.
I feel like I have posted 'the stack' in here quite a lot recently so let's just note the components here but please refer to the link above for more:
Financial Stack = Regulation + Funding + Technology + Product + Analytics + Distribution
I disagreed with the Gates' sentiment then, I still disagree and I will, frankly, always disagree.
Why? Funding drives the economics of the financial stack and banks do this much better than Fintech companies.
As interest rates rise, that is a key strength of the banking sector.
🔑 A key strength to the tune of $19.5T in Deposits in the US according to Y Charts below as at the end of June 2022.
🔑🔑 Looking specifically at Agricultural Banks in the US is also sobering. 👀
This is the Total Deposit base for a subset of the FDIC (Federal Deposit Insurance Corporation) Banks with specialisation in Agriculture - there are currently 1,061 of these to be exact.
Importantly, the $257bn in Assets also excludes the Farm Credit system and other banks active in Agri Finance without a specialist Agriculture designation such as Rabobank, Wells Fargo, or Bank of America.
I also reviewed a sample of the FDIC banks to get an indication of interest rates offered, to act as a proxy for their current funding costs and 2.02% was the highest I came across, which is still very cheap funding.
🥊 Agri Fintech has a great hill to climb
🚖 Driving the economics
"After climbing a great hill, one only finds that there are many more hills to climb".
Nelson Mandela summed it correctly above and with interest rates rising, the economics will be 'many more hills to climb'.
I have calculated roughly $3bn available in credit for Agri Fintech companies in the US, which is an educated guess I am in the process of refining.
This funding will likely cost at least 5% depending on the source of funds and what they are used for (for example, certain climate smart programmes such as this one may have lower funding costs for ecosystem led outcomes).
This spread between the interest cost of money (on customer savings) and the interest it earns (charged to clients on loans) is the Net Interest Margin and a main source of bank income.
Considering money as the product, buying something for cheaper (very low savings rates) allows you to sell it for cheaper i.e. lend it out at lower rates.
This has been pronounced for the past 6-9 months, with the American Banker magazine noting:
Banks collectively grew loans and net interest income in the first half of this year, as customers borrowed more to invest following the worst of the pandemic. At the same time, interest rates started to climb, making loans more profitable. This helped many lenders expand their margins.
The higher the cost of funds, the less competitive you become and this is a bind that many lending based Agri Fintech companies will currently face.
In fact, even banks are worried. Agricultural Banks have ranked interest rate volatility as their top concern in 2022 according to the Fall 2022 Agricultural Lender Survey.
🥊 Yes, Agri Fintech can offer technology to scale and increase distribution much faster for credit, but if the unit economics are thin, or even non existent, then it increases the risks for companies, their lenders and investors.
What happens now?
Balance sheets are apparently now in vogue with the wider Fintech market. In reality, they've always been a priority.
A group of investors I spoke to in relation to this Issue all shared the same sentiment, particularly with respect to the recent rate hike:
It's starting to play its way through for us but it might take 30-60 days to fully catch up.
A lot of borrowers have an end of year term so it may well be early 2023 before we get full visibility on the situation.
I suspect in the first quarter of next year we might see some restructuring in the sector as companies work their way through this 'new' normal.
There are three types of activities which will reduce the impact of this.
✳️ Strategic Partnerships - A recent partnership in this domain that I have noted before is that between Evergreen Bank and Tillable or even Silo partnering with Jeffries to expand their financing.
Similarly, in India, DGV which is building specifically in the huge dairy sector, has partnered with Federal Bank.
These partnerships are more strategic in nature and represent efforts on both sides to the bridge the gap between technology, data and funding.
Don't get me wrong, costs will still creep up with the wider market but market access should be less of a problem.
✳️ Capital markets refer to packaging loans into a defined structure and selling this structure to investors. This is less prevalent but some companies may have already built a reputation for themselves with investors.
☀️ Agri Fintech is actually a bright spot in this regard, much more so than generic fintech companies, due to the asset rich profile of many investments and structures.
Capital Markets is a broad topic I will cover separately in two later Issues - Latin America and North America, so stay tuned for those.
Companies will still be exposed to rising funding costs, but perhaps, as above, market access is less restricted.
✳️ Deposits are not an obvious one and is actually very difficult for any Fintech company to implement without a full banking licence or dedicated banking partners.
But as Walden Mutual, also referenced in my last issue have shown, there are ways to navigate this.
🥊 There are choppy waters ahead - no question - but I am still bullish as the sector is so early.
Let's keep going. 😀
There have been just 2 major funding announcements in the past 2 weeks but I noted some intriguing product and partnership announcements.
⦿ Agrolend have announced a $27m Series B to further their all round 'digital banking' capacity in Brazil, which I confirmed directly with the company but is available here for anyone who speaks Portuguese.
💭 In the Issue "What can we learn from Latin American Agri Fintech?" I covered some of the companies in depth. My key takeaway was that the Agricultural Finance sector is ripe for disruption in Brazil and the timing of companies such as Agrolend has been amazing. 👏
⦿ Agriconomie have raised a $60m Series B to become a European Champion in digital Ag Retail.
This is a huge amount in this environment and also for a European company where activity has been quite muted recently.
Another thing to note are the investors they bring in such as Temasek, the Singapore Sovereign Wealth Fund who have also invested in Farmers Business Network and Aliment Capital (Pontifax Agtech).
⦿ HKEX, Hong Exchange and Clearing announced another Carbon marketplace to rival a growing list of carbon marketplaces.
🤔 I would love to see Carbon expand as an asset class but it feels to me like we are not just there yet as it is very fragmented in terms of definitions, regulation and supply. I do need to research it more.
💭 However, if there is one thing we should all know by now, its that marketplaces don't solve market problems and there is an ever growing list of Carbon marketplaces arriving on the scene from serious players such as HKEX and:
⦿ And on the topic of partnerships DGV launch a partnership in India, to further expand their banking partners for the dairy sector.
*** If you operate in the sector and want to share updates, please do as I am more than happy to receive these.